Question

(a) Current Liabilities of a Company are Rs. 3,50,000. Its current ratio is 3 : 1 and acid test ratio is 1.75 : 1. Calculate the value of Current assets, Liquid assets and Inventories.

(b) Current Assets of a Company are Rs. 3,60,000. Its Current ratio is 2.4:1 and acid test ratio is 1.3:1. Calculate the value of Current liabilities, liquid assets and inventories.

(c) Working Capital of a company is Rs,30,000. Its Current ratio is 2.5:1. Calculate the value of (i) Current assets, (ii) Current liabilities, (iii) Acid test ratio, assuming inventories of Rs. 26,000.

Answer 1

(a) Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$

3 (Given) $=\frac{\text{Current Assets}}{\text{Rs. 3,50,000 ~(Given)}}$

$\therefore$ $\text{Current Assets}=Rs.3,50,000\times 3=Rs.10,50,000$

\text{Acid Text Ratio} \(= \frac{\text{Liquid Assets}}{\text{Current Liabilities}}

$1.75\text{(Given)}=\frac{\text{Liquid Assets}}{\text{Rs. 3,50,000 (Given)}}$

$\therefore \text{Liquid Assets}=Rs.3,50,000\times 1.75=Rs6,12,500$

$\text{Inventory}=\text{Current Assets - Liquid Assets}$

= Rs. 10,50,000 - Rs. 6,12,500 = Rs. 4,37,500

(b) \(\text{Current Ratio} = \frac{\text{Current Assets}}{ \text{Current Liabilities}}

$2.4\text{(Given)}=\frac{\text{rs. 3,60,000}}{\text{Current Liabilities}}$

$\therefore \text{Current Liabilities}=\frac{Rs.3,60,000}{2.4}=3,60,000\times \frac{10}{24}=Rs.1,50,000$

$\text{Acid Test Ratio = frac{text{Liquid Assets}}{Current Liabilities}}$

$1.3\text{(Given)}=\frac{\text{Liquid Assets}}{Rs.1,50,000\text{Calculated as above}}$

$\therefore \text{Liquid Assets}=Rs.1,50,000\times 1.3=Rs.1,95,000$

$\text{Inventory}=\text{Current Assets - Liquid Assets}$

= Rs. 3,60,000 - Rs. 1,95,000 = Rs. 1,65,000

(c) (i) Working Capital = Current Assets - Current Liabilities

Current Ratio of the company is 2.5:1, therefore, based on current ratio the working capital is 2.5 - 1 = 1.5.

If Working Capital is 1.5, Current Assets = 2.5

If Working Capital is 1, Current Assets = $\frac{2.5}{1.5}$

If Working Capital is 30,000, Current Assets $\frac{2.5}{1.5}\times 30,000=Rs.50,000$

(ii) Current Liabilities = Current Assets - Working Capital

= 50,000 - 30,000 = Rs. 20,000

(iii) Acid Test Ratio (Quick Ratio) = $\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$

Liquid Assets = Current Assets - Inventory

= Rs. 50,000 - Rs. 26,000 = Rs. 24,000

Acid Test Ratio = $\frac{24,000}{20,000}=1.2:1$.